In this article, we discuss two rules of Warren Buffet and understand their essence. A lot of people in the stock market quote these two rules of his, but the majority of them don’t even understand what they mean exactly, and what Warren Buffet actually tried, to communicate with his rules.
He mainly stressed on “Controlling losses” which is the most crucial point, when one deals with Equity. This can be directly investing in the stock market or through Equity mutual funds. Let’s look at them.
Warren Buffet Rule of Never Lose
Warren Buffet says, there are two rules in the stock market
Never Lose Money
Never forget Rule #1
Most investors have heard this and have read it a number of times. But for the most part, they’ve taken these words casually and feel that they are just funny lines. How can one never lose and how can that be the single most important rule in the stock market?
The real meaning of these two rules lies behind those words and if we dig a little deeper, we will understand the real value of those rules.
Let me decode it for you here. Read it with all your concentration & focus. Those two rules, really are, worth everything in the stock market.
What Warren Buffet really means when he says “Never Lose”?
No one in this world, wins all the time. One loses frequently, and this is true in stock markets also. No one can ever trade or invest in such a way that he/she never loses.
What Warren Buffer actually means by “Never Lose” is that every time we lose, it has to be an insignificant loss. The quantum of loss, has to be so limited or small, that It’s not going to affect us psychologically. If we make a profit of 100 every time and lose 20 or 30 every time we lose, we are actually not losing, if that’s your series of trades.
If you win 100 and lose 20, you are actually only winning 40 for every trade in series of 2 trades… But if you are letting your losses mount and never controlling them, then you are really losing and then those losses can impact you in a big way…
What he means when he says “Never forget Rule number 1”?
By this, he wants to emphasize on how important controlling losses are. Another one-liner of his, that in the stock market and in life you don’t need to do a lot of right things as far as you are not doing a lot of wrong things.
So, as far as you remember that controlling your losses is the topmost rule, you just need to be an average investor or trader and the power of compounding will take care of rest for you. I’ll summarize those rules again for you and what you should actually read in them.
Rule 1: Never Lose (Control your losses, cut them soon enough, so that you don’t feel them)
Rule 2: Never forget Rule 1 (Controlling your losses is the topmost priority you should have. As long as you are able to take care of it, other things will take care of themselves).
Let’s take an example – There are two investors, Ajay and Robert, who both make 1000 trades in their entire life, 500 losing trades and 500 winning trades. Ajay makes a profit of 6% on winning trades and a 3% loss on losing trade.
He has $11.9 Billion dollars in the end. On the other hand, Robert concentrates more on controlling his losses (and hence is able to control his losses up to 1% on average per losing trade) and also makes 5% on winning trades. At the end of his career, he would have $25 billion.
Conclusion
Its only controlling losses which made Robert more money than Ajay. Remember this, you need to concentrate more on “not messing it up” rather than making it “rock”.
There is a very funny conversation regarding Insurance . Do you get these kind of phone calls ? Put your comments 🙂
Ten ways to terrorize a telemarketer (contribution from a reader “shib “)
When they ask “How are you today?” Tell them! “I’m so glad you asked because no one these days seems to care, and I have all these problems; my arthritis is acting up, my eyelashes are sore, my dog just died.”
If they say they’re John Doe from XYZ Company, ask them to spell their name. Then ask them to spell the company name. Then ask them where it is located. Continue asking them personal questions or questions about their company for as long as necessary.
Cry out in surprise, “Judy! Is that you? Oh my God! Judy, how have you been?” Hopefully, this will give Judy a few brief moments of pause as she tries to figure out where the hell she could know you from.
If ABC calls trying to get you to sign up for the Family and Friends plan, reply, in as SINISTER a voice as you can, “I don’t have any friends… would you be my friend?”
If they want to loan you money, tell them you just filed for bankruptcy and you could sure use some money.
Tell the telemarketer you are on “home arrest” and ask if they could bring you a case of beer and some chips.
After the telemarketer gives their product info, ask him/her to marry you. When they get all flustered, tell them that you could not just give your credit card number to a complete stranger.
Tell the telemarketer you are busy at the moment and ask them if they will give you their HOME phone number so you can call them back. When the telemarketer explains that they cannot give out their HOME number, you say “I guess you don’t want anyone bothering you at home, right?” The telemarketer will agree and you say, “Now you know how I feel!”
Insist that the caller is really your buddy Leon, playing a joke. “Come on Leon, cut it out! Seriously, Leon, how’s your momma?”
And first and foremost: Tell them to talk VERY SLOWLY, because you want to write EVERY WORD down.
How to Attack Back on telemarketers
Pramod Moudgill shares how he attacked back beautifully on telemarketers when he got a call 🙂
I got a call from CitiBank for Credit Card. I asked them to only talk if they are serious about giving me the card because many call but they do not provide the call so I am really frustrated. The lady said sir what is your income. I said 30k a month to which she replied sir no problem we will definitely issue you a card. Are you salaried or … I said I am business man. What kind of business, “Madam main delhi mein auto chalata hoon”. She immediately reacted sir aapka card nahin ban sakta. Now it was my turn and I started, Kyon ji auto mein kya problem hai maam apna auto hai, sari kishten utar chuki hain, maam main bahut honest aadmi hoon, meter se chalta hoon , jab ek 70k ke Bike wale ko card de dete ho to mere paasv to 2lakh ka auto hai. All the time she was trying to speak but I just continued then finally she said sir co. policy nahin hai & again it was me ..”to pehle kyon nahin bataya mere 2 passenger chale gaye, harjana kaun dega meral loss kaun bharega main auto union mein complaint karunga & blah blah blah… & my no. is now free from citibank calls.
I got a call from ICICI bank for personal loan. I asked what is the rate, she said 18% . I asked “madam mere paas 2 lakh hain aap mujh se 15% par le lo. ”
She said “sir mujhe nahin chahiye” I said please aap holiday jao, LCD kharido & do what ever you want I am giving at only 15% come on.! Then again she said, “Sir maine bataya na mujhe nahin chahiye” Then I said” So who told you that I need one, jo aapne call kiya, aur aap log kya ek baar batane se maan jaate ho. Aap soch lo Iwill call you tomorrow.”
We conducted a Readers meet in Pune on 13th June and the response was amazing. There were around 15-16 people who came amidst mild rain on venue and it started on time. It was nice to see all the participants and their bonding with Jagoinvestor. We had a guest speaker from Ahmedabad and he gave a mind-blowing speech on how to change your psychology about money.
It was a learning experience for me too and It was really incredible to meet and talk to readers face to face and talk to them personally . Every one who came shared their expectations and what they learned from the meet and everyone was very interested in these meets in future. We are planning next meet this Saturday in Mumbai for which we already have around 25-30 people expected. I am sure it will be a better one 🙂 . Will be having these meets across other cities soon . Bangalore is next .
Overall Pune meet was a successful event and I would like to dedicate this to all the readers in Pune. It were readers who took the pain and took time to be there and have finally decided to continue these meetings in future and they are also looking at taking on various responsibilites to keep it ongoing . I would like each and everyone who came personally and it was amazing to see you all there . There is much more coming in future and you are the first one to be the part of it. Thanks 🙂 . Kindly acknowledge and share your experience in comments section .
Here are some of the short videos from meet , you can listen to speaker as well as some readers sharing their experience .
Pleaseregister here for future meets in your city . Any comments ?
There are a huge number of Indians who are working abroad or will go abroad one day and work there. Even you might go out of the country one day and become an NRI, so here’s a very short, to the point guide for NRI investments.
Today we discuss the most important NRI investment options and we’ll focus on four things – Basic Banking Accounts, Insurance, Mutual Funds, and Shares. That’s all. The rules and information here are basic, but further study can be very detailed. Let’s quickly look at some important concepts every person should know. Even if you are not an NRI, you can at least advice your other friends 🙂 The first step every NRI should take, is to get the correct Banking accounts opened. Here are the options:
What is an NRE account?
NRE bank account is an external savings bank account opened for Non-resident Indians and hence called Non-Resident External account. Any money lying in the NRE account can be taken outside the country or in other words, the money lying in an NRE account is fully repatriable. This money can be converted into any foreign currency and can be remitted outside the country. For opening these accounts, the funds are required to be remitted to India through any bank from the country of residence of the prospective account holder. The accounts may be maintained in any form e.g. savings, current, recurring or fixed deposit account, etc. (How to find best Fixed Deposits in India)
What is an NRO account?
NRO bank account is an ordinary saving bank account opened for Non-resident Indians. This is why it is known as the Non-Resident Ordinary account. You open an NRO account when you want to transfer money from your overseas bank account to an Indian account in Indian Rupees. The money lying in the NRO account cannot be taken outside the country or in other words, the money lying in the NRO account isn’t repatriable. This is can be in form of Fixed Deposit accounts also (compare rates)
What is an FCNR account?
A FCNR account is a Fixed Deposit account with maturities of minimum 1 yr to maximum 5 yrs of tenure. FCNR stands for Foreign Currency Non-Resident (Bank) Account. The money in this account is always maintained in foreign currency, so it does not carry a currency risk (your $10,000 is always worth $10,000). The money lying in a FCNR account can be taken outside the country (or in other words, it is repatriable.) Deposits in these accounts can be made by remitting funds from abroad.
Comparison of Table
Criteria
MORE
NRO
FCNR
Account type
Saving , Current or
Fixed Deposits account
Saving , Current or
Fixed Deposits account
Fixed Deposit
only
Money maintained in which currency
Rupees
Rupees
Any of U.S. Dollar, Pound Sterling, Euro, Australian Dollar, Canadian Dollar
Repatriable (can money be taken outside the country)
Yes
No
Yes
Money can be
Deposited from
From Abroad through Bank account
India or Abroad
From Abroad through Bank account
Tax
Exempt
Taxable
Exempt
Joint Account with Indian Residents
No
Yes
Yes
Suitable for
NRI’s whose income source is only from abroad
NRI’s how have income source from both India as well as Abroad
NRI’s who dont want to want to take currency risk
Can NRI take Insurance?
Yes, NRIs can buy Insurance in India; however they have to be present in India, while taking the Insurance. They should, therefore, plan for buying the insurance when they are on a trip to India. One important point, is that the premiums should be paid from NRE account, if the maturity value is to be repatriable, else only the partial amount will be repatriable,(for which premiums were paid from NRE account.) One has to make sure, they have all the necessary documents in place before they come to buy insurance.
Documents are
PAN Card
Income Address proof
Overseas Proof of Address
Proof of Income (Salary slip, Bank Statement or ITR for last 3 yrs)
you will also have to fill a separate form called NRI Questionnaire-Annexure II
NRI investment in Shares ?
Steps required by NRI’s to start trading in Stock Markets
Apply for a PAN card (you can do it online.) You will get it within a week.
Open an NRE/NRO account. You will require this account to fund money for your stock market transactions. Make sure you choose the account carefully, depending on your requirement (Repatriable/Non-Repatriable basis etc.)
Apply for a general approval for investment in Indian Stock Market through it’s designated bank branch, this is called PIS (Portfolio Investment Scheme) (PIS rules in detail)
Once you have a PAN card, you’ll have to open a Demat account with any bank or a brokerage firm – you will require this for trading.
Finally, you need to have an online stock market trading account for investing in the stock market directly. Generally, you can get a combo Trading + Demat account at the same place.
Note that NRI’s are not allowed to do intra-day trading (can’t buy and sell on the same day)
NRI investment in Mutual Funds
NRIs can invest in all Indian mutual funds, except in funds promoted by Asset Management Companies based in the U.S. (Fidelity, Franklin Templeton and HSBC.) The payment can be made from any of the NRE/NRO/FCNR accounts. If they make payments from NRE/FCNR account, then it can be on a repatriable basis (They can take the profit and principal out of the country.) But, if they make payment from NRO account then it will be on non-repatriable basis. However, the dividends can be on repatriated. No prior or extra permission needs to be taken from RBI for this. This is allowed by default. There is no tax on dividend income, and long-term capital gains tax is zero in India when investing in Indian equity mutual funds.
It has been an excellent journey so far and we have to build a great community of readers who want to learn and understand the importance of personal finance. We have readers who are ready to learn much more if given a chance and they will if they are provided more support and platform.
So whats next? I have decided to take this blog to next level, so I have decided to form groups of enthusiastic people who are ready to learn at different levels and also want to join this “Jagoinvestor” movement and help to spread financial literacy. So we will group meets in different cities (Read Update). We will start from Bangalore first as I am in Bangalore. Later we will extend it to all the major cities in India like Mumbai, Delhi, Chennai, Pune, Hyderabad, Ahmedabad, Kolkatta etc.
Update
As I will be in Pune this coming weekend (Sat and Sun) and in Mumbai one day (preferably Saturday), We will start off these groups in Pune and Mumbai with whatever number we have, will choose one lead there and let’s kick off this idea fast :). I am sure we will have 15-20+ each place :). And we will start the group in Bangalore in July (as I will be in Bangalore only after June).
Note: As there are many readers from the Bay Area in the US (Sunnyvale / San Fransisco / San Jose). Readers there can also make the group (even 5 is ok), I have included Bay Area in Registration form Below.
What will happen in these Meets?
We will meet offline in person and build a community that will share their knowledge, ideas about a variety of topics that we discuss here on the blog.
We will also cover one focused topic in the form of presentation or session by any volunteer or expert in every meeting, it can be for 30-60 min long.
Discuss various strategies to invest money in the stock market (only after some meets, when more people are interested)
Discuss various topics like how to make better Real estate deals, tips, and tricks in investing which are not known generally to investors.
Build presentations and other content that can be shared back on the blog to all the readers.
Take up some research topic and then brain storm on the idea and find out why’s and how’s (example, BUY OR RENT ? )
How to plan all major aspects of financial life in the best way and be self-dependent
Current Registrations
(Changes dynamically with every Entry)
Any thing more?
This will be an informal meet which will start from the cafe’s or odd places and later we can think about how to formalize it more in a better way. There will be leads from each city who can take up the responsibilities so that it can function independently. Each city will have the main lead of the group who can be the main person in the group and take the responsibility of the meets. The meets will only be on weekends (2-3 hrs) so that everyone can join. In the start we will start this only in Bangalore (with me leading all the meets) and let’s see how this whole stuff goes, we can then take up this group meet idea to other cities once the situation permits and there are enough readers interested. Below is a registration form for registering yourself with jagoinvestor for these group meets, we will soon start these groups in all the cities once we get more than 10 interested people in any city. Please share your views and how we can make this concept a success.
Readers, I was working on building some basic calculators over the last month . They are ready to use now . The calculators are very basic and have a bare minimum look and feel , but works !! .
Please use them and provide any changes you feel should happen . one important point you should note is that all the figures are approx and the numbers you get might differ a bit from other calculators on net as the formula’s used might be on yearly compounding or payments have been considered at the end of the period rather than start . So don’t put much thinking on the exact numbers , take them as a general approx figures , anyways how does it matter if your retirement corpus is 4.53 crores or 4.58 crores !! 🙂
Look at this page for all the calculators listed at one place . Below is the list of all the calculators
Some days back I had written about GFactor concept for choosing a Financial Product based on 4 factors and formulating it in mathematics , Recently one of the writers for Business Bhaskar has copied the original idea of GFactor and republished it with same name “GFactor” and all the other names like “Trap Factor”, “R/R Factor” etc, without any permission from me .
This is not a general republishing of a general concept like SIP or Life Insurance that one can just change the wording’s and rewrite the same concept . It’s just the translation of the original idea and hence copyright violation. I have mailed the editor of the newspaper to look at it . The article was published in the online edition (Link) as well as print media (Newspaper Link) .
Update Jun 1 , 2010 : Business Bhaskar has resolved this issue with me and apolosized to me for whatever happened, they will republish the article with due credit to me .
Comments , please share your views on this issue ? How appropriate is it to copy content and translate it without permission ?
Retirement Planning is one of the most important aspects of financial planning. Here is a 3 part video series on Retirement planning which gives you a good idea of how to plan for it and how to think about retirement planning . Look at how to 6 Steps of doing Retirement Planning by yourself
Part 1
Part 2
Part 3
A very good book every one should read is “Retire Rich Invest” written by P V Subramanyam . Give your comments 🙂
Do you read comments ? There is a huge amount of discussion doing on in comments section, however many readers do not find time or interest to dig into the comments and follow the discussions, I would say comments have more knowledge than the article itself , as there are personal experiences and knowledge from many different readers, there is a threaded discussion on some topic in comments, which are more lively and engaging. So if you are just reading articles and not comments, you are missing a lot of things . So I went through some articles comment one by one and consolidated some learning and facts for my readers . ( See Learning from Comments Part 1)
1) Partha Iyenger shares what will happen to your mutual funds units if you bought it from Demat account and Company went bankrupt
If your online distributer Financial institution and asset management companies in India are regulated by RBI and SEBI. They constantly monitor the balance sheets and other relevant data of these firms and the respective regulators have put together necessary steps to ensure that the investors are protected by taking corrective steps. For eg.. when global trust bank collapsed, it was merged with Oriental Bank of Commerce and clients/depositors who had funds/securities in dmat accounts were able to get it back or transferred to the new Oriental Bank of Commerce account.. The process takes a while but you would get it. In India, we have excellent systems and process (much better than developed world) partly due to conservative policies framed by RBI and others regulatory bodies. For more information on the GTB scam related to deposits and demat accounts, you can read the link here . Another interesting aspect is that your order verification (on equity and etf purchases/sales) is posted on the NSE site on the same day. Your can ask your broker for the unique order number for the trade executed by you. You can verify the stock, price, qty, etc through this unique order number in the nse site. The orders are archived for a period of 8 years!
If am not wrong, NSE is probably only one or very few exchanges to have this facility for investors. This is a valid documentary proof for transactions done by you, which you can use in case your broker fails to send you the contract notes or ledger statements or if there are any discrepancies. Apart from this, the clearing corporation ensures that investors are protected from defaults by members by acting as third-party and your transactions are cleared. For more information you can read the RBI circular here . Next, all asset management companies have to follow strict guidelines in terms of their financials as prescribed by SEBI. The foremost criteria is 40% of net worth of the AMC has to be brought in by the sponsor. A sponsor is a company/consortium/institution which would like to float the asset management company. It also appoints trustees who oversee the amcs. The trustees have the authority to monitor and replace the asset management company , if they fail to perform their duties effectively at any point of time.. This is apart from the regulators and government.. Of course, one needs to be more careful while choosing your broker and investment companies and constantly monitor news and events related to the company.. If at any point of time you get uncomfortable, you could pull out your investments and park it in other stronger firms. (Link)
2) Milind Kotibhaskar shares his experience with a ULIP Agent (over email with me)
Many years back, I was studying in the college and staying in hostel. One evening, one decent looking young man entered my room. He told me that he was from my home town and gave me few references. He thus established a good rapport with me. Then he gently told me that this night he has to leave for Delhi ( or Bangalore or such place ) to attend a job interview. But he has lost his train ticket and he does not have money to buy new one. This job is a lifetime opportunity for him, but he will not be able to make it due to lack of money. So would I be so kind as to lend him some money so that he can travel and attend the interview ? He looked sincere and genuine. I gave him whatever money I had. He thanked me and said that he will return my money as soon as possible. Later when I told this to my friends, they started laughing at me and said I will never see him again in my life, and that is what happened.
Years after, 6 months back, ABN Amro people visited me ( I have salary account with them ). All dressed nicely ( tie and all that ). They wanted to sell me ULIP. They made impressive speech, talked about the returns that I would get etc. All this to a fellow who has crossed 50. I think these people were no different from the conman that duped me in the hostel. I know mutual fund agents who persuaded their clients to sell their existing MF schemes and buy NFOs ( agents used to get very good commission on NFOs ). I know LIC agents who ask their clients to surrender existing policies and buy new one so that these agents can meet their annual targets and to earn hefty commissions on Insurance policies . I feel sorry for the conman who took few rupees from me, and if caught in the act, would have faced police action. Instead he should have become an LIC agent or ULIP agent. He then could have conned more people without fear of police action and got more money in return.
3) Partha Iyenger shares How Real Estate prices gets manipulated by handful of big players .
During the period of Nov 2007-January 2008, large number of high net worth investors got carried away by the bull market assuming that they could make quick returns by booking profits when the sensex moves to 25,000. A large sum of the money allocated for real estate investments (in parts or full) by these investors were moved to stock markets and commodity markets. When the markets crashed immediately, which they did not expect, they were struck. The couldn’t pull out the monies, due to losses. The real estate market which was also on a bull run till then, found the buyers who had shown interest earlier [some of them made advance payments], specifically in premium apartments, backing out. Read Real Estate Returns in India
Hence the Mumbai markets went through a period of correction (though the cycle was shorter) and picked up again gradually when the markets started its rally since April 09..In fact, some of the developers to speculate [through leverage as well] in the stock markets and move it back to their business.. As usual timing is very difficult and that’s why one of the problems faced in the last two years by real estate markets is ‘cash’.. Which means not completing projects in time!
The single word for this phenomenon is ‘liquidity’. I am afraid you could get reliable statistics on real estate, since India lacks transparency[ be it in title deeds or transaction mechanisms] and we are yet to have real estate investment trust vehicles or REITS which would help track data and give a better picture. It should happen soon… (Link)
4) Pramod Moudgill shares his excellent insight on how to look at Fund houses and Fund managers
a) Whether it has some discipline and process set for investments or it is only a One man show i.e. fund manager is calling all the shots. The former is always better.
b) Whether the fund is keeping an eye on the funds if they are being true to their mandate and the fund manager is not deviating from the mandate for the sake of returns.
d) What is the performance and association of the investment team with the fund house. Is it changing fund managers every year ? if so then a big problem.
e) I dont know about others but to me the important point is the credibility of the parent company.
Let us evaluate fund houses on above parameters
1) Sundaram has a strict cap that none of its diversified funds will invest more than 5% in a single stock (Except select focus – Its mandate is to remain focus), At FT the stock selection is done by a team of experts and the same is true with HDFC. These things make sure that one person can not skew the investments to his will.
2)Sandip Sabharwal is arguably the shrewdest fund manager India have ever seen. If you see the portfolio of SBI funds then you can observe that all the diversified funds had 90% stocks in common, so a global fund a contra fund a midcap fund and others were same despite their different mandates. Now look at DSP top 100 it doesnt have a single midcap stock, DSP midcap not a single large cap. Same with HDFC Top 200 and Sundaram midcap or Growth fund. When I invest in a large cap fund I know that I will be geting a large cap fund for sure. FT blue-chip and Prima do not have a single stock in common. Look at some good Equity Mutual funds
3) DSP has only seven equity funds and is winning so many awards based on that only. HDFC has only one sectoral fund. Sundaram recently has launched some new funds but if you compare these houses are conservative with new launching. They have every kind of funds and that is good. Look at Tata , Birla, Reliance they work like NFO Factory. The sole aim is to get money via NFOs.
4) Fund managers, – Prashant Jain is with HDFC for 10 Years, Naganath with DSP for a decade, Sukumar ans Siva Subramaniam with FT for over 12 Years. other that Anup Bhaskar no fund manager has left Sundaram in a long time. Can others (of course Nilesh Shah and Madhu Kela are there) boasts of such long relations.
5) Finally the corporate governance, Check yourself about the credibility of Sundaram and HDFC. Other two are internationally acclaimed.
OK that is the criteria I used, There are some others which may be fitting in these parameters but then performance is foremost and you can check about the consistency for these funds over many years. It has not been a flue. Keep a watch on IDFC and ICICI. Former is transforming itself and the latter is relatively new. Somehow I feel that 2010 will belong to these two guys. In the first quarter fall they have shown character. (Link)
Comments please , Did you like these comments and the learning ?
Do you want your children to be smart when it comes to Finance? Don’t you want them to learn all the things, which you’re learning today, from this blog & other resources? And that they don’t repeat the mistakes, we made in our lives?
Financial Education for Children is as important as their regular education. Sadly, we do not have in our school curriculum. However, you can start teaching your children, the basics of money, so that they become, more aware, more responsible and think in a better way about finance.
It’ll not just help your children, but even you as a parent in many ways. Here, I present 9 things to teach your children.
How to save money
Most kids today are indulged, like never before. All they do, is spend. The money mostly comes from one of the parents. The kid asks you for a 100 bucks to buy the latest thingamajig, you question them why, they answer you, and you give them the money.
This generally, makes them believe that once they give you a “good enough” reason, the money’s in the bank (or their grubby li’l hands) 🙂 . You need to make sure, that kids understand how you save money. This will happen only, when they themselves, understand how to save money.
Let them save some money for their little goals (even big ones’). If your kid wants to buy something, which you think can wait, encourage them to save towards its purchase. Whenever you give them some money for anything, ask them to save 25% of it for that goal.
Apart from this, you can give them some small amount weekly to save for that goal directly. Please buy a piggy bank for your children. You can buy a fancy one or the clay one we had in our days 🙂 It works!
How to keep track of money
You should teach your kids where the money at home comes from, where it goes and how much is saved. I’d ask them to maintain a simple table where they can write how much money they received, & when, from whom, & where it was spent.
These 4–5 things are good enough for a small child to start with. If you have a computer at home, you can make an excel sheet and ask your kid to maintain the account, while making sure, that things are very simple for the kid to understand. Don’t over do it 🙂
Once they start doing this exercise, they’ll gain an awareness of where they spend their money & to what extent. You can sit with them each quarter, and review the sheet. Don’t try to point what’s right or wrong. Just gently point out facts; that’s all.
How to pay what its worth for something
Have you ever faced a situation when your kid bought something and they were cheated & charged exorbitantly? Or demanded something from you, but they thought that it’s wasn’t that expensive? Kids don’t always realize, just how much something costs. They just want it.
The best way to deal with this situation, would be to ask them upfront, what they think, is the price of something. If they demand a video game from you, they might not know how much it costs. So ask them, what they think is the price, & what is the maximum they’d like to pay for it.
Many times, you will find that the price is much more than they themselves think. In which case, they might want to reconsider buying it.
My experience:
I remember, when I was young, my brother & I demanded a video game from my dad. He fobbed us off a couple of times, but later he asked us, “Pata bhi hai kitne ka aata hai?” (“Do you know how much it costs”) . We were puzzled, as we really didn’t know the cost.
We assumed it’d cost us something like a 1000 bucks, but we later found, that it actually sold for more than 3,000 at that time. Once we knew the price and compared it to the value it delivered, it didn’t make sense to buy the game. We had much better, healthier entertainment options.
And guess what? Dad bought us the game, next year! 😛
How to spend money wisely
Ask them their priorities, what they need this year, what their wishes are, and help them sort out their desires and their requirements. Ask them, what is more important? What’s secondary? This way, you encourage them to think in the right direction.
You are giving them an opportunity to understand difference between needs and wants. This might not be true for small kids below 10, but will be more relevant for children in between the ages of 10 & 18. Kids often times speak or figure out amazing things, which we adults don’t think about. Do this exercise and you might find, that your kid has real smarts!
Please share examples from real life if any 🙂 .
How to think about money
You should make sure that your child’s attitude towards money is shipshape; that they respect money, understand that it takes an effort to earn, and also understand the fact that, while money is important, it’s only secondary, as far as happiness & a content life are concerned.
Talk about money in front of them in a way, which gives them an appropriate view. Make sure, you don’t give them an impression that the family’s happiness isn’t as important as your job or business. Read Personal Finance Mistakes
How to live on a budget
If you give your children pocket-money, make sure they live on it, the entire month and they do not come to you smack bang in the middle of month, asking for more, for things they could have managed with the same pocket-money.
This happens only when children deviate from their monthly needs and carelessly spend on what they don’t need. While, they may ask for more, because of some emergency need sometimes, over a long-term, you should make sure they stretch with that pocket-money.
Children will understand budgeting better, if you yourself practice it (ouch!). When they see how you allocate expenses each month, and stick to it, chances are, they will replicate it at their level. While, this whole thing can be tough initially, help them out, by giving them the extra money they need in first 2-3 months and then restricting gradually.
Watch this video to know how to raise a smart child about money:
How to invest
Start teaching your child, the different ways of investing. Teach them basic banking, how banks operate and what it means to earn interest on an amount. You can also buy them some games which teach investing. Ask them to deposit some amount with you and you can pay them interest per month.
When you give them pocket-money, say Rs.500 per month, ask them to deposit back Rs.250 with you, with the assurance that next month you will pay them 10% interest on that amount, i.e : Rs.275. Though you might be out-of-pocket by Rs 25, the knowledge you impart to them is priceless !
This Rs.25 gives them the important message, that saving their money and investing regularly can increase their money many times over.
Don’t tell me you want your children to do regular 9-5 jobs! Don’t you want to instill some entrepreneurial skills in your children right from start, so that they know what they want to do in life and take an initiative to work along those lines?
The first step:
First step is to talk about different ideas your children have. When they are small, they can have weird ideas, but listen to them, & ask them how they can make money from some idea. Ask them questions like “Can you think of some idea, using which, you can make money?”
My own brother who is 13 yrs old makes weird stuff out of junk which can act like a toy gun! He once said, that if he can make 10 of those and sell at Rs 20 each, there will be many friends of his who will be ready to buy it. Though he didn’t do it, he surely has the right attitude.
You can encourage your child to do some random / different / creative stuff for a few hours every day (during vacations at least) and pay them extra money for it. This will help them earn some money and also help you do some work for which you wanted to pay someone!
If you have a garden, you can ask your child and his friends to do some random things for which you wanted to hire a guy anyway. This has some advantages; First – your children will understand, it’s not that easy to earn money and they have to work for it.
The second step:
Here, you will help your kids to spend some time constructively, which they would have spent playing or roaming around or playing video games. And finally, your money stays at home 🙂
Thinking a bit bigger, maybe you can really involve your child and his friends and work on some month-long project… one, that has a whole business plan, revenue model and which then earns money for 1 month (may be this can be done in summer holidays). Wow… this seems exciting, talk to your child about this today and see the response.
Ideas? Anyone?
How to handle credit
You should also start teaching your child, to handle credit.
If you pay them Rs 500 pocket-money and in the same month they demand Rs 200 extra, you can give them that money, but now introduce them a concept of “credit”. Tell them that it’s not going to be free and you are cutting Rs 50 for next 4 months from their pocket-money and paying them just Rs 450.
If you want to add some horror and suspense, make it 5 months (charge interest). This will make sure they ask for extra, only if they need to. Stick to this with discipline, and don’t fall for emotional atyachaar from your children,(they are really good at it, especially girls!)
The previous point’s example can also be used here. If you are making some small project for them from which they can earn money, loan them some seed money like Rs 1000-2000 (as a venture capitalist) and then demand the money back after 1 month with interest. (I come up with crazy thoughts at times 🙂 )
Conclusion
Teach your children basics of money from the very start. These tips will act as a foundation for your child’s financial education and they can build upon these learnings in the future. Most of these tips are for children, but can be used for your spouse, who may not be that good at personal finance. What say?
Comments, Can you also share your tips ? Do you think these tips will be helpful to your children? If no, then what are the obstacles?
